Forecasting Day-Ahead Electricity Prices: Utilizing Hourly Prices
APG Asset Management
Kees E. Bouwman
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Dick J. C. Van Dijk
Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM
May 6, 2013
Tinbergen Institute Discussion Paper 13-068/III
The daily average price of electricity represents the price of electricity to be delivered over the full next day and serves as a key reference price in the electricity market. It is an aggregate that equals the average of hourly prices for delivery during each of the 24 individual hours. This paper demonstrates that the disaggregated hourly prices contain useful predictive information for the daily average price. Multivariate models for the full panel of hourly prices significantly outperform univariate models of the daily average price, with reductions in Root Mean Squared Error of up to 16%. Substantial care is required in order to achieve these forecast improvements. Rich multivariate models are needed to exploit the relations between different hourly prices, but the risk of overfitting must be mitigated by using dimension reduction techniques, shrinkage and forecast combinations.
Number of Pages in PDF File: 35
Keywords: Electricity market, Forecasting, Hourly prices, Dimension reduction, Shrinkage, Forecast combinations
JEL Classification: C53, C32, Q47
Date posted: May 18, 2013
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